Barack Obama and Republican leaders in the House of Representatives are deadlocked over how to raise the US debt ceiling.
As the deadline of August 2 fast approaches, the IMF has warned of a "severe shock" to the world economy if the US runs out of cash to pay its bills.
What is the debt ceiling?
The debt ceiling is the legal limit on the amount of money the US government can borrow to pay its bills, which includes the salaries of federal employees, federal programs such as Social Security and Medicare (a health insurance program for the elderly), and principal and interest payments to bondholders. The current limit is $14.3tn.
What has gone wrong this time?
The US constitution stipulates that only Congress can authorize the federal government to borrow money. Since 1962 Congress has raised the debt ceiling 72 separate times, including 10 times in the past decade alone.
A rule adopted in 1979 had allowed the House of Representatives to automatically raise the debt limit to whatever level the budget required. But in January 2011, the House voted to repeal this rule, requiring the House to hold a separate vote to increase the debt limit.
When Obama took office in January 2009 in the midst of the biggest economic turndown since the Great Depression, US public debt stood at $10.6tn. This May, two and a half years later, the current debt limit of $14.3tn was reached. The US Treasury can extend the August 2 deadline by exploiting various loopholes, such as postponing pension payments to federal employees.
Most analysts say that even after August 2, the Obama administration has some flexibility to continue meeting their payments at least for a few more days. Federal Reserve chairman Ben Bernanke has said that after August 2, the Treasury will prioritize payments on federal debt.
Republicans, who currently control the House of Representatives, want to reduce the national debt by cutting government spending. Some Democrats are calling for a mix of tax increases as well as spending cuts. The latest Democratic plan contains no tax increases, but Republicans argue that it does not cut spending enough.
Most (though not all) legislators agree that a deal needs to be reached to avert catastrophe. The question is how this deal will be structured.
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